Weaker Equity Markets Sets Tone in Forex Market

Overnight equity futures markets are under pressure once again. Theweakness began in the international markets which were hit by a 5%decline in China’s Shanghai Composite Index.

Overnight equity futures markets are under pressure once again. The weakness began in the international markets which were hit by a 5% decline in China’s Shanghai Composite Index. This move put some pressure on Europe which spread to the U.S.

Volatility could highlight today’s trading action because the reports are split with Durable Goods due at 7:30am CDT and the Beige Book at 1:00 pm CDT. Traders are hoping that the Durable Goods Report shows an improvement in consumer spending to go along with the better than expected earnings which have been driving equity markets higher. Investors also expect to see the Beige Report show that the rate of decline in the economy is abating and that there are signs of an economic recovery.

The weakness in the equity markets overnight has triggered a flight to safety response in the foreign currency markets with the Dollar showing strength. The EUR USD has been under pressure since yesterday when technical traders triggered a closing price reversal top. The next downside target is a retracement zone at 1.4069 to 1.4013. There may be a technical bounce to the upside if this area is tested.

The GBP USD is also feeling downside pressure. The bearish fundamentals seem to have caught up with this market. For months, traders have known that the U.K. economy was weak and that the budget deficit was too large. Despite the bad news, traders continued to drive this market higher in conjunction with greater demand for higher risk assets.

The Canadian Dollar looks the most vulnerable to the downside. Lower equity markets coupled with a sell-off in crude oil should cause speculators to bailout of this currency in a big way.

The Australian Dollar is trading weaker overnight. The sell-off in the Chinese stock market could have a bigger effect on the AUD USD since Australia is a major trading partner of China.

Traders are more risk averse this morning which should lead to downside pressure in the NZD USD. Weakness in global equity markets triggered by a sell-off in the Shanghai Composite Index is leading traders to take shelter in the U.S. Dollar.